Adaptive expectations and heterogeneous anchoring in a New-Keynesian framework

Abstract
We investigate the role of heterogeneous expectations in a New-Keynesian framework. Agents choose expectation values for output and inflation from a distribution of values around the central bank targets: the output gap and the inflation target. Their choices depend on past performance and the level of anchoring is given by variance of this distribution, which may be different for both variables. We thus evaluate the role of heterogeneous anchoring with respect to the two targets of the central bank. Numerical simulations suggest that expectations unanchored from the central bank targets produce waves of optimism and pessimism. This result holds also when only inflation expectations are unanchored from the target. In addition, we find that introducing adaptive expectations reinforces the presence of waves of optimism and pessimism and may drive output and inflation away from the central bank targets permanently